Question

Explain the difference between inclusive and extractive economic institutions. What are the political and economic outcomes associated with each type of institution? What are the sources of economic institutions?

Answer 1

Inclusive institutions are those economic institutions which allow all the individuals to make their own choices. Such institutions take along the citizens and allow their participation in economic and political activities according to their choices.Other provisions of inclusive institutions are presence of unbiased law, private property, and equal opportunities to masses. In the long run inclusive institutions are believed to aid long-run economic growth of the country.

Extractive economic institutions are institutions that do not allow the participation of most of the citizens of the country in politico-economic activities according to their choices. Most of the decisions are made by few elites who control all the power and hold most of the wealth in countries with extractive institutions. Citizens in such institutions have no freedom and can not even own private property. It is generally believed that in the long run such institutions do not favor industrialization and economic growth.

Sources of economic institutions are broadly laws and regulations operating in a country. A country with well-established laws and regulations foster creation of economic institutions that favor economic growth and create equal opportunities for the citizens of the country.